After the two-day FOMC meeting that ended on Wednesday (18/03), Fed Chair Janet Yellen said that the US central bank refrained from raising the US interest environment as the country’s inflation figure is still tame while US economic growth somewhat moderated. It also informed markets that an interest rate hike is unlikely to occur at the next FOMC meeting in April. On the other hand, the Federal Reserve dropped the word ‘patient’ from its guidance on interest rates and therefore markets believe that the hike may occur in the (late) summer this year provided that the US labour market continues to improve and US inflation is about 2 percent. These statements caused strengthening emerging market assets on Thursday (19/03). For example, the Indonesian rupiah appreciated 1.19 percent against the US dollar based on the Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR. One day later, however, the JISDOR (the benchmark rupiah rate of Indonesia’s central bank) depreciated 0.52 percent to IDR 13,075 per US dollar.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Despite only short-term momentum brought about by the Federal Reserve’s FOMC outcome, Asian currencies had a good week. The Bloomberg-JPMorgan Asia Dollar Index, involving the ten most-traded currencies in Asia (excluding Japan’s yen) rose 0.9 percent, advancing the most since December 2011. The Indonesian rupiah appreciated 0.88 percent against the US dollar over the past week, the biggest gain in five months. This performance was supported by Bank Indonesia’s decision on Tuesday (17/03) to maintain its key interest rate at 7.50 percent (after having made a surprise 25 basis points cut in the previous month). Its decision to keep the country’s interest rate environment steady is a signal that Bank Indonesia prioritizes the currency and this provides near-term support for the rupiah. Indonesia’s central bank also added that it aims to strengthen measures to ensure rupiah stability. As such, Bank Indonesia slightly changed its tone. During the past month, it signalled that it was fine with a weak rupiah as that would boost Indonesian exports thus limiting the country's wide current account deficit.

Meanwhile, the Indonesian government is to implement several reforms that aim to support the economy, including the currency. It specifically targets to boost exports while limiting imports in a move to improve the current account balance. These reforms include waiving value-added tax for shipbuilders as well as other strategic industries, imposing temporary anti-dumping taxes, increasing the mandatory biofuel content in diesel to 15 percent, providing tax allowances to export-oriented companies, expanding visa-free short-term visits to citizens of 30 new countries, merging the country’s state reinsurance firms, and requiring all commodity exporters to accept letters of credit (L/C) only in selling their goods. It is positive that the Federal Reserve has refrained from raising US interest rates as this provides more time for Indonesia to implement these reforms thus having stronger fundamentals at the timing of higher US interest rates. This may result in less severe capital outflows from Southeast Asia’s largest economy amid looming further US monetary tightening.

However, as Indonesia’s markets are exposed to a relatively high degree of foreign ownership, the country remains more vulnerable than others to capital outflows. About 38 percent of current outstanding rupiah currency bonds are in the hands of foreign investors. For this reason McKinsey & Co said that Indonesia is one of the countries that is at risk of “abrupt capital outflows and currency depreciation if the USA raises short-term interest rates” particularly as the country has been plagued by a structural current account deficit since late 2011.

Morgan Stanley was more optimistic about Indonesia when it recently removed the rupiah (as well as the Indian rupee) from its “fragile five currency” list, arguing that the Indonesian government and central bank had implemented potentially notable economic reforms (particularly the recent subsidized fuel price policy reforms).

Meanwhile, Indonesia’s benchmark stock index (Jakarta Composite Index, or JCI) fell 0.20 percent to 5,443.06 points on Friday (20/03).

Jakarta Composite Index: